On the Relationship between Arithmetic and Geometric Returns
19 Pages Posted: 14 Jun 2012
Date Written: August 14, 2011
For a conventional portfolio of risky assets, the paper presents four approximate relationships between the portfolio's arithmetic expected return, geometric expected return, and variance. The paper provides simple quantitative explanations for all four relationships. The results of these formulas are compared to historic data and to each other. The paper identifies the relationship that should be expected to produce the most reliable results.
Keywords: arithmetic expected return, arithmetic average, geometric expected return, geometric average
JEL Classification: G00, G10, G11
Suggested Citation: Suggested Citation